While we have been worried about the Delta variant for several weeks now and bemoaning the markets preferring to ignore it and celebrate “back to normal,” the panic yesterday was surely overdone. This is a boon if it results in inspiring the hesitant to get vaccinated, although even better would be the CDC bureaucracy to change the “emergency use” designation to “approved.” Over 3 billion doses have been given worldwide—how much evidence do they need?

The normal course of a panic is not a single day, so the seeming recovery is abnormally speedy and not to be trusted. Next up is the expiration of various emergency benefits, including eviction moratoria and unemployment benefits, in a few weeks. In addition, the Delta Panic will inhibit and postpone capital spending plans and more importantly, hiring plans. Remember the 9 million and the Fed’s projection that the labor market will not get full recovery until 2023. So, just as the panic was overdone, the recovery will be overdone only to see a slide back down when reality-checking kicks in, although we admit reality-checking has been in short supply of late.

One of the most interesting things about the panic is bond-buying that is perceived as invalidating inflation fears, at least according to Bloomberg. Even Pres Biden said yesterday that no mainstream economist is predicting lasting high inflation. And granted, the U of Michigan 5-year inflation expectation and other measures do point to a relaxed attitude—this is not the 1970’s. One of the secondary benefits is “confidence in government institutions,” in this case, the Fed.

For the immediate future, we probably have to expect the dollar to lose some of its shine in a normal Tuesday pullback plus a retreat from Delta Panic, but after a few days, risk-off may easily rear its ugly head again and dampen animal spirits. The process will be spotty and uneven. Sterling, for example, is continuing to get dumped and is bumping up against every channel and band. The CAD, AUD and NZD—the three most likely to taper and raise rates first—are still suffering with nary a glimpse of a hawk. We have dueling channels in the peso. This is an unstable environment and vulnerable to sharp, swift and short-lived reversals. This is a dangerous market.

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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